Daily Newsletter, Tuesday, 7/19/2016

Table of Contents

Market Wrap

10% Rally

by Jim Brown

The Dow was lifted to a new high by 10% of its components and those were JNJ, MCD and UNH.

Market Statistics

Normally you would like to have more than 10% of stocks in an index participating when that index makes a new high. UNH, JNJ and MCD gained a total of 6.65 points and that equates to about 49 Dow points. The index made a new high but only gained +26 points. That is hardly a bull market rally.

Europe and Asia posted mostly declines and that carried over into the U.S. market. The German ZEW poll on investor confidence fell from +19.2 in June to -6.8 in July compared to consensus estimates for +9. That is the lowest reading since the Financial Crisis. Clearly, the Brexit vote crashed the survey but that is the new reality. Investors are very concerned about how the Brexit will impact Germany and the EU. The broader EU Consumer Confidence data is due out on Wednesday and it is expected to be significantly lower. This weighed on the European markets.

There was only one economic report in the U.S. today. The New Residential Construction for June rose to 1.189 million starts, up from 1.164 million in May for a 4.8% increase. Single family starts rose from 745,000 to 778,000 and multifamily rose from 390,000 to 411,000.

Permits also rose from 1,136 million to 1.153 million. Single-family rose +7,000 to 738,000 and multifamily rose 10,000 to 415,000.

However, the gains were not enough to lift the sector out of its lethargic rut it has been stock in over the last year. Starts have topped out below 1.2 million since April 2015. There is a mild uptrend but it is very lackluster.

The economic calendar for Wednesday is blank except for the weekly mortgage applications and the EIA oil inventories. Thursday's Philly Fed Manufacturing Survey remains the most important report for the week.

Tuesday was all about earnings and there were some high profile events. Goldman Sachs was the big winner with earnings of $3.72 that beat estimates for $3.00. Revenue of $7.93 billion also beat estimates for $7.58 billion. However, despite the good earnings, shares declined nearly $2. Second quarter compensation declined -13% to $3.33 billion and operating expenses fell -26% to $5.47 billion. Equity trading was only $1.75 billion and below Q1 at $1.78 billion and under estimates for $1.79 billion.

Goldman's beat was almost entirely on cost cutting, which is always good, but investors were hoping for better growth rather than more cost cuts. You cannot cut costs forever. They did see a strong uptick in bond trading as investors fled to safety.

UnitedHealth (UNH) earnings rose from $1.64 to $1.96 per share. Revenue rose from $36.36 billion to $46.49 billion. Analysts were expecting $1.89 and $45.04 billion. Revenues rose 28% for UnitedHealthcare and 52% for the Optum health science unit. They narrowed the full year outlook to $7.80-$7.95 per share. UnitedHealth booked $200 million in losses under Obamacare because of higher than expected services given to sicker individuals. For the full year the company expects to lose $850 million, up from $475 million in 2015. At the end of the 2016 cycle the company plans to exit most of the 24 states where is sells on the exchanges to roughly 750,000 members. They are going to sell the Nevada, New York and Virginia business. "We do not expect any meaningful exposure to Obamacare in 2017."

Shares rallied $1.84 to help lift the Dow to a new record.

Johnson & Johnson (JNJ) reported earnings of $1.74 compared to estimates for $1.68. Revenue of $18.5 billion also beat estimates for $17.97 billion. They guided for the full year to $6.63-$6.73 and $71.5-$72.2 billion. Analysts were expecting $6.61 and $71.72 billion.

Global consumer sales declined -1.8%. Domestic sales increases 2.1% but international sales fell -4.4% because of a 5.4% hit on currency issues. JNJ shares rallied $2.11 to help lift the Dow to a record.

Phillip Morris (PM) reported earnings of $1.15 that was below the $1.21 in the year ago quarter. Analysts were expecting $1.20. Revenue of $6.65 billion also missed estimates for $6.77 billion. The company said the miss wa caused by increasing sales in low margin geographies. The company reitereted full year guidance for $4.45 to $4.55. Shares fell -$3.11 on the news.

Lockheed Martin (LMT) reported earnings of $3.32 on revenue of $12.9 billion. Analsyts were expecting $2.93 on revenue of $12.55 billion. They raised full year guidance from $11.50-$11.80 to $12.15-$12.45. Revenue forecasts were raised from $49.6-$51.1 billion to $50.0-$51.5 billion. The company said deliveries of the F35 fighter were accelerating and the outlook for future years was strong. Shares spiked to $2.63 on the news and pulled back to close at $2.59 for a decent $2.67 gain.

After the bell, Microsoft (MSFT) reported earnings of 69 cents that beat estimates for 58 cents. Revenue of $22.64 billion also beat estimates for $22.1 billion. Revenue for the Azure cloud service rose 102% in the quarter and usage more than doubled. Total cloud revenue rose 7% to $6.7 billion. The Office365 cloud product saw revenue rise 54%. Revenue from the personal computing segment declined -4% to $8.9 billion because of a 79% decline in phone revenue. Shares rallied $2 in afterhours to $55.30.

Despite a 32% decline in fuel costs, United Airlines (UAL) reported a 51% decline in earnings to $2.61, which still beat estimates for $2.56. Revenue fell -5.2% to $9.4 billion and barely beating the $9.39 analyst estimates. The company announced plans for a $2 billion stock buyback. Shares were flat in afterhours.

Intuitive Surgical (ISRG) reported earnings that rose 23% to $5.62 on a 15% rise in revenue to $670 million. Analysts were expecting $4.97 and %640.7 million. They sold 130 Da Vinci systems at $1.5 million compared to 110 systems in Q1 and 118 in the year ago quarter. Shares spiked $46 to $717 in afterhours.

The headline earnings for Wednesday are EBAY, FFIV, INTC, QCOM and AXP.

F5 Networks reports earnings on Wednesday but they were up strongly today on acquisition rumors. In early June, they reported they had retained Goldman Sachs to review some acquisition offers. The news has been very quiet since that June announcement and shares have been volatile. I speculated a week or so ago that we could get some news with earnings on Wednesday. On Tuesday it was rumored that private Equity firm Thoma Bravo might be a buyer. The company acquired Qlik Technologies earlier this year. The New York Post broke the news the PE firm was also interested in F5. Citigroup speculated in a June 7th report that HPE, Dell, EMC and Cisco could also be interested. We could have a significant bidding war if all those parties decide to make an offer.

The Dollar Index soared to a four-month high on the drop in the ZEW Investor Sentiment report and better than expected housing starts. The spike in the dollar weighed on commodities including oil, which fell to $44.59 on its way to $43 or even lower. The strong dollar is going to make Q3 earnings are challenge and could push estimates back into negative territory from their current +0.6% estimate.

The API inventory report showed a -2.3 million barrel drop in crude levels but gasoline inventories rose 800,000 barrels. This pressured prices after the close.

Markets

Bank of America Merrill Lynch said cash levels held by fund managers hit 5.8% in the latest fund survey. That is the highest level since November 2001. Equity hedging is at the highest level in the survey's history. The S&P has rallied nearly 9% since the post Brexit low but managers continue to hoard cash.

The bank said with $12 trillion in negative yield debt in the global markets investors are worried financial conditions are tightening. The Fed is not expected to make a move until 2017. "A record number of investors are saying fiscal policy is too restrictive and the first underweighting of equities in four years suggest that fiscal easing could be a tactical catalyst for risk assets going forward" according to BAML. More than 39% of fund managers believe helicopter money will become a reality compared to 27% in June. That means they believe there is more QE ahead. Source

The S&P and the majority of the indexes have been moving sideways in a very narrow range for the last four days and today that range began to fade. The S&P 400 Midcap Index ($MID) shows the trend the best. Every index except for the Nasdaq has this pattern. This suggests the "consolidation in place" we have been seeing for the last several days may have run its course and we could be looking at a future decline even if it is just temporary.

Volume has been weak at 5.6 billion shares on both days this week. There is definitely a lack of conviction on both sides.

The S&P has stalled at 2,168 since the opening gap on Thursday. It has been trading in roughly a 10 point intraday range but posting end of day moves of 1-5 points. The S&P and the rest of the markets are seriously overbought from the post Brexit rebound and they need a decent dip to give cautious investors something to buy. Nobody wants to buy a top that has lasted for five days. It is like watching a firework smoke for five minutes but you are afraid of getting your hand blown off if you pick it up and try to light it again. Investors are afraid to buy the top and get their account blown up if a sudden decline appears.

The Dow actually made a new high with a 20-point spurt right at the close thanks to those three stocks I mentioned earlier. That lifted it up to just over the top of the range but not enough to really call it a breakout. With multiple Dow components reporting earnings on Wednesday, the index could go in either direction.

The Nasdaq is struggling at a much lower level to the Dow and S&P. The index finally punched through the 5,000 level but immediately stalled. The biotech sector is dragging on it again and Netflix was also an anchor on Tuesday. The Nasdaq is also overbought but only at a lower level.

The Russell 2000 pushed through resistance at 1,205 but immediately came to a dead stop at 1,210 and has fallen back from that level after five days with no progress. If the small caps are going to roll over it could drag the rest of the market lower.

I am looking for a dip for a trading buy but I suggest it be a passive buy rather than a back up the truck event. August and September are seasonally the two weakest months of the year and the end of July normally fades into that weakness. The influx of cash from Europe is supporting the market but it will not last forever. The Bank of America news on rising cash positions and active hedging by funds shows there is a lot of negative sentiment in the market. On a contrarian basis that is great because it will fuel a monster rally once the market really turns higher. I am just not convinced we are there yet. There are too many political headlines and possibly some economic ones to allow a monster rally before the elections. I could be wrong but I would rather be in cash and be wrong than be fully invested and be wrong about direction.

NVIDIA Corporation operates as a visual computing company worldwide. It operates in two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for deep learning, accelerated computing, and general purpose computing; and GRID for cloud-based streaming on gaming devices. The Tegra Processor segment provides processors that integrate a computer onto a single chip under the Tegra brand name; DRIVE automotive computers, which offer supercomputing capabilities; and tablet and portable devices for mobile gaming under the SHIELD name. The companyâ€™s products are used in gaming, professional visualization, datacenter, and automotive markets. It sells its products primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers, and retailers/distributors.

Q1 earnings rose 46% to 33 cents and beat earnings by a penny. They hiked full year revenue guidance as well as the current quarter. Tor Q2 they raised the forecast to $1.35 billion that was above analyst estimates at $1.28 billion. Gaming revenue was up 17% to $687 million but all areas of effort saw significant gains. They recently released a new graphics card that is twice as fast and 40% cheaper than the card it is replacing.

Nvidia's Graphics Processing Units or GPUs have become more than just video chips. They have become supercomputing processors and can be packaged in large groups to parallel process monster datasets and computations that would have taken weeks with conventional chips. They are truly revolutionizing the processor industry.

The focus on Artificial Intelligence or AI, a lot of companies like Google and Amazon are turning to GPUs to handle the monster amounts of data they collect every day. Facebook already uses Nvidia M40 GPU accelerators to power its Big Sur machine learning computers. Those NVIDIA GPUs were specifically designes to train deep neural networks for enterprise data centers, and the company says they are 10-20 times faster than other network computers. Nvidia said their GPD powered machine learning computers can help train networks new things in just a few hours that would take days or weeks with less powerful systems.

The new P100 GPU is 12 times faster than the prior version and can provide more performance than "several hundred computer nodes" and up to eight P100s can be interconnected to provide previously unheard of computing power. The chips in the GPUs contain more than 15.3 billion transistors each and the largest chip ever built at 16 nanometer technology. That is twice as many as on Intel's biggest chips. The P100 delivers more than 10 teraflops of performance. One teraflop can process one trillion floating-point instructions per second and the P100 can do 10 teraflops or 10 trillion calculations per second.

The COSMOS weather forecasting application runs faster on the P100 than the 27 servers, running twin multicore processors each that were previously tasked with the project. Intel makes commodity processors for the millions of PCs and servers in the world. Nvidia is light years ahead of Intel in technology. Nvidia's data center revenue increased 63% in Q1.

More than 50 automakers are testing the new Drive PX chip for self-driving cars. The chip combines inputs from cameras, lasers, maps and sensors to allow cars to drive themselves and learn from each experience.

Earnings August 11th.

We were stopped out of the August position last week and I said we would be entering a new position on this stock. I am recommending we enter an October position and hold over earnings on August 11th. Nvidia has everything working for it including a string of recent product announcements and earnings should be good and guidance even better.

This is a risk. We all know what can happen if they disappoint. I believe Nvidia will make new highs, market permitting, and we can go along for the ride.

I am recommending the Oct $60 strike at $1.42 because I believe it will be over $60 by then and $1.42 is not too much to risk to hold over an earnings report.

With a NVDA trade at $54

Buy Oct $60 call, currently $1.42, no initial stop loss.

NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays

In Play Updates and Reviews

Stuck in a Rut

by Jim Brown

The S&P remains stuck in a trading range with no material movement over the last four days. The market continues to consolidate in place with no material movement in either direction. The Dow did manage to add 25 points to close at a new high at 18,560. The surge came at the bell when the index went from +5 to +25 in just a few minutes.

Unless there is a material move higher over the next couple of days the buyers are going to grow tired of holding stocks with no gains and they will begin to exit. If the market fails to rise for a long period of time it will eventually fall. Rarely does it move sideways for a week or two and then suddenly explode higher.

Current Portfolio

Current Position Changes

JACK - Jack in the Box

The long call position remains unopened until a trade at $89.25.

Profit Targets

Check the graphic above for any profit stops in green.
We need to always be prepared for a profit exit at resistance.

Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow.
We need to always be prepared for an unexpected decline.

No specific news. Shares spiked to $89 at the open but faded with the market.

This position remains unopened until JACK trades at $89.25.

Original Trade Description: July 18th.

Jack in the Box Inc. operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Eats fast-casual restaurants primarily in the United States. As of February 17, 2016, it operated and franchised approximately 2,200 Jack in the Box restaurants in 21 states and Guam; and approximately 600 Qdoba Mexican Eats restaurants in 47 states, the District of Columbia, and Canada.

Jack in the Box bought Qdoba from ACI Capital, Western Growth Capital and other private investors in 2003. That chain started with the Zuma Fresh Mexican grill in Denver Colorado in 1995. The chain became famous because of the fresh food and fast service even though lines often stretched well out the door. Their claim to fame was the fresh food. They replaced the traditional animal fats with vegetable oils and used fresh vegetables whenever they were available. The name was changed to Z-Teca in 1997 because of trademark claims and then changed to Qdoba in 1999 for the same reason.

They captured another segment of fans in 2014 when they changed the price structure to a fixed price based on the protein and everything else was included. A chicken burrito cost $7.80 and steak burrito $8.49. You can add anything you want for no additional charge.

Qdoba also serves breakfast and some locations are open 24 hours.

Chipotle Mexican (CMG) also started in Denver two years before Qdoba. Chipotle has had multiple food issues over the last three years and business is falling fast. Same store sales have routinely declined more than 10% per quarter. Morgan Stanley penned a brutal downgrade last week and cut the price target from $500 to $405. Maxim Group reiterated a sell with a target of $300. DB is targeting $350. Morgan Stanley surveyed 2,000 customers in June and 13% of those questioned said they would not go back to Chipotle. Another 13% said they have returned rarely compared to frequently before the food problems started. Some 45% said they are eating there less often and 26% said they had not eaten there since the food problems.

Morgan said customers had found alternate dining locations during their abstinence from Chipotle. One of those locations is Qdoba where business has been increasing rapidly.

In their Q1 earnings, the company said they were going to open more Qdoba stores with 50-60 in 2016 and 20 additional Jack in the Box stores. They reported a 39% increase in earnings to 85 cents that beat estimates for 70 cents. Same store sales (SSS) at Qdoba rose 2.1% for company owned stores and 3.1% for franchised stores. The number of transactions increased 3.7%. They guided to SSS at 1.5% to 2.5% for the full year.

Shares popped 12% on the earnings news to $87. Since then they consolidated for a month and are back at a 52-week high at $88.50, which is also resistance. A break over that level could retest the 2015 high at $99.99.

Lumber Liquidators operates as a multi-channel specialty retailer of hardwood flooring, and hardwood flooring enhancements and accessories. It primarily offers hardwood species, engineered hardwood, laminates, and resilient vinyl flooring; renewable flooring, and bamboo and cork products; and a selection of flooring enhancements and accessories, including moldings, noise-reducing underlay, adhesives, and flooring tools. The company also provides in-home delivery and installation services. The company offers its products primarily under the Bellawood brand and Lumber Liquidators name. It primarily serves homeowners, or to contractors on behalf of homeowners. As of December 31, 2015, it operated 366 stores in the United States and 8 stores in Canada.

LL was trashed in March 2015 after a 60 Minutes report that the laminate flooring sourced from China had excessive levels of formaldehyde. Shares dropped from the prior close just under $70 to $10 earlier this year. Sales plummeted and earnings took a dive.

On Friday the company announced that the Consumer Products Safety Committee (CPSC) had closed their investigation and the only concession LL had to make was to not sell laminate flooring made in China. Since they already stopped that practice 13 months ago, it was basically a get out of jail free card. Shares spiked 19% on Friday to $15.78.

The company also reported that they had tested 15,000 homes with that flooring installed and NONE of those homes had chemical levels over the recommended norms. Of those 70,000 homes some 1,300 underwent special testing by a certified laboratory and NONE of those homes tested above safe levels either.

The CPSC also warned about ripping out the existing flooring and replacing it. They said the process of ripping it out would expose homeowners to excess levels of the chemical so that removes the possibility of a massive recall problem by LL.

LL has a class action suit brought by homeowners but with the CPCS saying there is no problem with the installed floor the suit just lost its main reason for existing. I am sure it will continue and they will try to get some damages but proving you have been damaged when there is no problem is going to be a challenge.

LL escaped a massive recall. They will probably settle for peanuts on the class action suit and there were no fines or penalties. They are probably celebrating all weekend at the corporate headquarters.

Now all they have to do is win back the customers. Same store sales have been down 10-13% because of the looming problems. Now that they can claim there never was any problem they can launch a massive advertising campaign and sales should recover. It may be slow at first but they still have a good selection of products at the right prices.

While their troubles may not be completely over they are light years closer to business as usual than they were a week ago. Funds and investors have ignored their stock but with the all clear from the CPSC they should come flooding back in hopes of getting a bargain entry.

Earnings July 27th.

LL shares spiked to $16 on the news back in mid June. They moved sideways until the Brexit crash and lost altitude back to $14. Today's close was a six-month high over that headline spike in June. I believe the stock is poised to go higher now that it is trying to pull out of its yearlong consolidation.

I am going to recommend a longer-term option and suggest we hold over the July 27th earnings. They would be hard pressed to say anything more negative than what the market already expects. The potential for good news and positive guidance is very good.

Position 7/8/16:

Long Nov $18 call @ $2.15. No stop loss because of the cheap option and the longer term.

PVH Corp. operates as an apparel company in the United States and internationally. The company operates through six segments: Calvin Klein North America, Calvin Klein International, Tommy Hilfiger North America, Tommy Hilfiger International, Heritage Brands Wholesale, and Heritage Brands Retail. It designs, markets, and retails mens and womens apparel and accessories, branded dress shirts, neckwear, sportswear, jeans wear, intimate apparel, swim products, handbags, footwear, golf apparel, fragrances, cosmetics, eyewear, hosiery, socks, jewelry, watches, outerwear, small leather goods, and home furnishings, as well as other related products. The company offers its products under its own brands, such as Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD, ARROW, Warners, Olga, and Eagle; and licensed brands comprising Speedo, Geoffrey Beene, Kenneth Cole New York, Kenneth Cole Reaction, Sean John, MICHAEL Michael Kors, Michael Kors Collection, and Chaps, as well as various other licensed and private label brands.

PVH has been absolutely crushed in the sell off because they were thought to have as large presence in the UK. Shares closed at a new 9-month high of $102.70 on Thursday. Today they touched $84 intraday for a whopping $18 or roughly 18% decline in two days from a new high.

PVH thought it was important enough that they filed a disclosure with the SEC saying they only derived 3% of their revenues from the UK. Even with the massive drop in the pound the company did not think any UK weakness would be material to their results.

The company has been on a growth spurt by acquiring brands and doing license deals with other brands to improve the variety of its offerings. On June 15th the CEO spoke at a Piper Jaffray Consumer Conference and said business was improving in Q2. He said the problems with other retailers represented an opportunity for the Calvin Klein and Tommy Hilfiger brands. He said the Tommy Hilfiger women's business generates 30% of their revenue and was a growth opportunity since they recently added it to the line. They teamed up with super model Gigi Hadid to make the brand more relative to younger, fashion oriented women.

With their Q1 earnings they raised guidance from $6.30-$6.50 to $6.45-$6.55 a share for the full year. The CEO said the guidance was conservative because this "does not seem like the environment ro tray and be a hero."

No specific news. The Axon body cameras only cost $399 each but the subscription to Evidence.com is $79 for each camera. The city of Chicago bought 2,031 cameras for $810,369. However, the 5-year subscription to Evidence.com was worth $9.63 million in recurring revenue. Shares closed at a new high.

Original Trade Description: July 14th.

TASER International, Inc. develops, manufactures, and sells conducted electrical weapons (CEWs) worldwide. The company operates through two segments, TASER Weapons and Axon. Its CEWs transmit electrical pulses along the wires and into the body affecting the sensory and motor functions of the peripheral nervous system. The company offers TASER X26P and TASER X2 smart weapons for law enforcement; TASER C2 and TASER Pulse CEWs for the consumer market; and replacement cartridges. It also provides Axon Body, a body-worn camera for law enforcement; Axon Body 2 camera system; Axon Flex camera system that records video and audio of critical incidents; TASER Cam HD, a recording device; Axon Fleet, an in-car video system; Axon Interview, a video and audio recording system; Axon Signal, a body-worn camera; and Axon Dock, a camera charging station. In addition, the company offers Evidence.com, a cloud-based digital evidence management system that allows agencies to store data and enables new workflows for managing and sharing that data; Evidence.com for Prosecutors to manage evidence; and Evidence Sync, a desktop-based application that enables evidence to be uploaded to Evidence.com. Further, it provides Axon Capture a mobile application to allow officers to capture digital evidence from the field; Axon View, a mobile application to provide instant playback of unfolding events; Axon Five, a software application to enhance and analyze images and videos; Axon Convert, a software solution to convert unplayable file formats; and Axon Detect, a photo analysis program for tamper detection.

With all the shootings both by police and at police the need to be able to accurately document the events is becoming even more important. The multiple shootings by police and captures on cell phone video only shows one side of the event. If those cops had body cameras to document what they were seeing, hearing and saying, it would go a long way towards making those events less of a flash point if they can present their side of the event.

Since the Dallas shootings, Taser has won orders for more than 1,591 body cameras from the San Jose Police Dept and the Minneapolis Police Dept along with a 5-year subscription to Evidence.com, Taser's cloud based digital evidence management platform. Taser said demand was growing rapidly and they were in discussions with many more departments about their full range of evidence technology.

According to Taser more than 3,500 agencies and departments from 33 major cities now use their cameras.

Earnings August 3rd.

Shares spiked to $28.50 after the Dallas shootings and then pulled back to $26.50 after the headlines cooled. The news of the big orders lifted shares back to $27.50 and rising. Taser was already in a strong uptrend and the temporary spike has now been digested and the trend is returning.

I am recommending we buy the Sept $29 call, currently $1.60. If the market rolls over as I expect on Friday we could get a better entry on Monday. I am recommending an entry trigger at $27.80, which is above today's high. If the market opens lower, we will not be triggered and we can reevaluate the entry point for Monday.

Citi raised the price target on WDC from $55 to $65 and reiterated a buy rating. They also raised the target on Seagate from $18 to $29 and upgraded from sell to hold. Shares of WDC were down slightly because of the weak tech sector.

WDC just completed the acquisition of flash memory maker SanDisk on May 12th and the combination will put it significantly ahead of Storage Technology (STX). WDC can include flash memory into its disk drive products to make them significantly faster as well as expand its offerings in the SSD market. By acquiring the SanDisk product line it provides a large amount of marketing breadth and created the premium data storage company.

Last Wednesday WDC raised adjusted earnings guidance to 72 cents, up from 65-70 cents. Analysts were expecting 68 cents. They raised revenue guidance from $3.35-$3.45 billion to $3.46 billion. Analysts were expecting $3.41 billion. This is the second guidance raise for this quarter. Back on May 26th they raised revenue guidance from $2.6-$2.7 billion to $3.35-$3.45 billion.

Earnings July 28th.

WDC has solid resistance at $51 but a breakout over that resistance could quickly sprint to $60. I am using the October options to avoid the rapid decline in August premium after July expiration next Friday. We will exit before earnings on the 28th. This is a short-term play to capture any continued market breakout.

Zillow Group, Inc. operates real estate and home-related information marketplaces on mobile and the Web in the United States. It offers a portfolio of brands and products to help people find vital information about homes, and connect with local professionals. The company's brands focus on various stages of the home lifecycle, such as renting, buying, selling, financing, and home improvement. Its portfolio of consumer brands includes real estate and rental marketplaces comprising Zillow, Trulia, StreetEasy, and HotPads. The company also provides advertising services to real estate agents and rental and mortgage professionals; and owns and operates various brands that offer technology solutions to real estate, rental and mortgage professionals, including DotLoop, Mortech, Diverse Solutions, and Retsly.

Back in August 2015 Zillow Group split its stock 2:1 but the new stock had no voting rights. The Class C stock trades under the symbol Z while the Class A stock with rights traded under the symbol ZG. The company did this so the voting rights would not be diluted. Multiple companies have done this including the biggest to date with Google and Facebook. The split has no impact on the company operation except that employees now receive Z shares and any acquisitions will be made with Z shares.

The company acquired Trulia.com for $2.6 billion in 2015 and contrary to analyst concerns the integration has been relatively smooth. There were some hiccups but everything is functioning normally today.

They reported Q1 earnings of 13 cents that beat estimates for a loss of 9 cents. Revenue rose from $127.3 million to $186 million and beat estimates for $177 million. They also raised full year guidance from $805-$815 million to $825-$835 million. Analysts were expecting $794 million. They ended the quarter with $514 million in cash. Marketplace revenue rose 23%, real estate revenue rose 34% and mortgage revenue rose 65%.

Earnings August 2nd.

In early June, the company made a windfall settlement with Move.com for $130 million after two years of litigation. Analysts were expecting $1.8-$2.0 billion. This pending litigation had been a cloud over the stock for the last 8 months. After the settlement shares spiked to $32 and traded sideways for two weeks before moving up to new highs at $35.50. The Brexit crash knocked the shares back to $32.75 but after the last two days of gains it is threatening to breakout once again.

Shares closed at $35 so the August $40 strike is a little far out for a short period of time. I am going to stretch to the November $40 strike, which will have significant expectation premium when we exit before earnings.

No specific news and minor gain. Shares are still holding at the recent low.

Original Trade Description: July 16th.

AMC Networks Inc. engages in the ownership and operation of various cable television's brands delivering content to audiences, and a platform to distributors and advertisers in the United States and internationally. The National Networks segment operates five distributed entertainment programming networks under the AMC, WE tv, BBC AMERICA, IFC, and SundanceTV names in high definition and standard definition formats. This segment distributes its networks in the United States through cable and other multichannel video programming distribution platforms, including direct broadcast satellite and platforms operated by telecommunications providers.

RBS says AMCX is a dead man walking. They downgraded the network to "sell" because some of its most popular shows are seeing their ratings walk off a cliff. The previously popular series "The Walking Dead" (TWD) has declined significantly in the ratings with a 40% drop in the 2016 season. The show routinely kills off cast members that have been with the program for years. The finale for the sixth season saw viewership significantly lower than the prior season finale. Spoiler alert, another prominent cast member is not going to make it through the next season opener. The cliff hanger left viewers unsure which one it will be but all the major players are at risk.

The new show that was spun off from TWD was "Fear the Walking Dead" and it barely made it out of the first half of the second season season alive. AMC has said it will air the second half of season 2 starting on August 21st. if viewership does not pick up fast there may not be a season 3.

Another previously popular show "Better Call Saul" saw "strong double digit ratings declines" while viewership on the new shows "Preacher," "Night Manager" and "Feed the Beast" has been lackluster at 50% less than analysts expected.

UBS is also worried that AMC will be shutout of the skinny bundles that will be offered by Hulu in 2017. That would be a further cash drain on AMC.

Earnings August 4th.

Shares dropped -4% to $56.59 on the RBS downgrade on Friday but that could be the start of a larger decline. The 52-week low was $55 in late June. Morgan Stanley cut AMC from buy to neutral in late June. Shares spiked on the 30th after Lions Gate bid for Stars. AMC was thought to be up for grabs if there was further media consolidation. Since that spike shares have traded sideways despite the strongly bullish market. The drop on Friday killed that sideways trend.

Snack maker Mondelez bid roughly $23 billion for Hershey last week and the offer was quickly refused. Hershey has turned down several acquisition offers since 2002. In 2002 the Wrigley company tried to buy it and failed. In 2007 Cadbury also failed. In 2010 the trust prevented Hershey from bidding to buy Cadbury. The problem with acquiring Hershey is that the Hershey Trust Co. owns 81% of the voting stock and 8.4% of the common stock. Nothing will happen unless the trust approves.

The trust was setup in 1909 to benefit the Milton Hershey School for underprivileged children and the community of Hershey Pennsylvania. The trust has built up a $12 billion endowment for the school and is well liked for the good works done around the community.

The board has also said multiple times they do not want to sell the company.

Another factor is the Pennsylvania Attorney General. Any sale would require the approval of the AG under a 2002 state law. He has the power to overrule the trust if he feels any sale would not benefit the citizens of Pennsylvania.

Here is where the challenge comes in. If Mondelez buys the Hershey Company then the trust gets a lump sum of money but that is all they will ever get. Once they spend it the benefit is over. If Hershey stays independent the trust will remain the benefactor of Hershey PA for another century. The profits from Hershey will continue to flow through the trust to the school and other entities to support the community. Hershey pays out about $500 million a year in dividends. The AG is not likely to allow the golden goose to be sold.

I believe this acquisition bid will fail. Mondelez may raise the offer but I doubt the board, trust or AG will accept it. The spike in the stock to $115 will fail and shares will return to the $95-$100 level where they were trading lat week.

This is a speculative position so do not play with money you cannot afford to lose. I am making this a spread because the put options are expensive for obvious reasons.

The Russell ETF continues to struggle with resistance at $120 and the Russell 2000 lost -7 points today as the markets weakened.

Original Trade Description: July 2nd.

The Russell 2000 ETF attempts to track the investment results of the Russell 2000 Index composed of small-capitalization U.S. equities.

The Russell 2000 is facing strong resistance from 1150-1165. The index actually touched 1,190 in early June but I seriously doubt we will see that level again. The S&P closed right at 2,100 and has strong resistance from 2100-2115. The Dow closed only 72 points under the post Brexit close at 18,011.

We recovered from the post Brexit crash on a combination of equity fund window dressing for the end of the quarter and pension funds rebalancing the ratio of bond to equities. Reportedly they had to buy up to $18 billion in equities.

Now we are at resistance and all those uplifting events are over. The uncertainty over the UK exit still exists and the dollar/pound imbalance will cause a significant number of earnings warnings for Q3.

All the fundamentals point to a weak July and the artificial lift from the end of the quarter buying is over.

Note the volume in SPY and IWM puts for August on Thursday. The far right column is the open interest and the second from the right is the volume traded on Thursday. This is about 3 times the number of calls for the same period. The vast majority of traders are expecting a market decline.

I am recommending we buy puts on the IWM because the premiums are cheaper. I am recommending an entry trigger because we could still move higher ahead of the long weekend. S&P future are down -4 but that could be temporary.

Position 7/5/16 with an IWM trade at $113.95

Long August $112 puts @ $2.62. No initial stop loss.

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